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BusinessWeek: ‘Taking the iPhone Apart’

Friday, 27 July 2007

I wrote yesterday that I couldn’t find a single article on iPhone component costs citing a source other than iSuppli; iLounge contributing editor Charles Starrett emailed with a pointer to Arik Hesseldahl’s article for BusinessWeek earlier this month, citing Austin-based Portelligent for an iPhone tear-down. Portelligent’s estimated component cost for a $599 iPhone: $220.

Hesseldahl writes:

[Portelligent’s] estimate doesn’t include costs of final assembly, but it does give some insight into the gross margin on the device. Historically Apple’s gross margins have run ball park of 50 percent plus or minus a few points.

That’s just not true, unless by “historically”, he means “for a few years in the Sculley era during the late 1980s”. Apple’s gross margins are publicly available in their quarterly financial statements. Here are their gross margins for the last four years:

2007 Q3

37%

2007 Q2

35

2007 Q1

31

2006 Q4

29

2006 Q3

30

2006 Q2

30

2006 Q1

27

2005 Q4

28

2005 Q3

30

2005 Q2

30

2005 Q1

29

2004 Q4

27

2004 Q3

28

2004 Q2

28

2004 Q1

27

There is an interesting uptick in the last two quarters, but even with those two higher-than-usual quarters, the average for these 15 quarters comes out to 30 percent. That’s a lot of “minus” for “50 percent plus or minus a few points”.

As with iSuppli, I’m not disputing Portelligent’s component cost estimates — nor am I disputing that these estimates are interesting and potentially useful. My dispute is that the sum of the component costs is significantly less than the cost to produce a product. Subtracting the component costs from the retail price does not give you the gross margin. Do Apple products assemble themselves in some sort of Willy Wonka-like magic factory?

Even so, it’s also the case that Apple products, and the iPhone in particular, are not manufactured wholly from off-the-shelf commodity components. Hesseldahl writes:

The most expensive component on the phone, [Portelligent CEO
David] Carey says, is the touch screen, for which Apple tapped a
little-known German concern called Balda. The estimated cost of
$60 per unit is mostly an educated guess. “This screen is like
nothing I’ve ever seen before,” says Carey.

Even the fact that Balda made it, is in fact, an educated guess.
Carey told BusinessWeek that his analysis found no apparent
markings that identified the screen’s origin. But Balda’s role in
the screen has been something of an open secret in the wireless
industry since the iPhone was first announced by Apple CEO Steve
Jobs in January. Even so, Apple apparently took steps to make the
source of the screen hard to identity.

So, regardless how reasonable and informed these tear-downs are, they need to be treated by the press as estimates, not facts.